Even governments face supply constraints

While the global banking system, households and corporations, all now struggle to reduce borrowing, it has been left to governments to lever up to compensate, borrowing heavily to raise funds to support the liabilities of weakened banks and to provide economic stimulus. Away from emerging markets that fund heavily in foreign currency, there is a widespread assumption that government debt is risk-free.

That view might be challenged in the capital markets this year, as investors price in huge new supply.

"If you look at the supply side of the equation in the debt capital market," says Roberto Isolani, joint head of global capital markets at UBS, "we are still adjusting to the disappearance of the leveraged investor base that previously drove spreads to their historical lows. Hedge funds used to provide the bulk of...